Organizational Structure of Sole Proprietorship
A sole proprietorship is the simplest possible business structure. All you need to do to form one is to go online and fill out a basic business license application with your state or city. Because of this simplicity, the organization structure for a sole proprietorship is the most common one used by small business owners. In fact, more than 70 percent of American small businesses are sole proprietorships.
A sample organizational chart for a sole proprietorship would have only a single tier because the owner/operator is legally and financially responsible for every aspect of the business.
A sole proprietorship business is owned and run by a single individual. The owner is responsible for day-to-day business decisions or for hiring other people to make these decisions. Sole proprietorships are closely held businesses, and business owners with plans to build corporate empires usually choose other business structures such as C corporations and S corporations that better lend themselves to growth and complexity.
A sole proprietorship starts and ends with its owner. If the founder of a sole proprietorship business sells the company, the new owner cannot technically buy the sole proprietorship business but must form a new business entity, whether it's another sole proprietorship, a partnership or a limited liability company.
The new business may own the same assets, market itself under the same business name and sell the same products as the original sole proprietorship, but from a legal and financial standpoint, it operates as an entirely new business under an entirely new organizational structure.
The owner/operator of a sole proprietorship business is legally responsible for that company's actions and transactions. If the business signs a lease or borrows money, the owner must follow through on these obligations even if the sole proprietorship goes out of business. If a customer or random pedestrian is injured or sickened as a result of business activities, the owner is liable for these damages and can be sued.
Earnings from a sole proprietorship business are taxed as personal self-employment income for the business owner. These earnings are calculated on the Schedule C tax form that is part of the owner's personal tax return. This form calculates business earnings by figuring the sum of business expenses such as rent, materials, labor, utilities, taxes and licenses and subtracting the sum of these expenses from the sole proprietorship's gross revenue.
Earnings from a business structured as a sole proprietorship are treated as self-employment income and are subject to self-employment tax. This tax combines the Medicare and Social Security withholdings that are typically taken out of employee paychecks with the matching amounts that employers must pay on their employees' paychecks. Because a self-employed individual is both employer and employee, self-employment tax is double the typical withholding amounts.
Small business advisers often recommend staying away from the sole proprietorship structure, treating it as a case study in lack of training for a business startup. However, the popularity of the structure reflects the fact that it really does work for many small business owners despite the dire warnings.
Sole proprietorships work especially well for small, relatively simple companies, especially when an individual with a skill simply wants to get started in business with as little fanfare or hassle as possible. The startup process is straightforward, the bookkeeping is relatively simple and you can even use your own bank account as your business account, although you should still keep meticulous track of which expenditures are personal and which are for your business.
The added legal and financial liability that comes with a sole proprietorship organizational structure makes this option an unattractive choice for people who own assets they don't want to put at risk. In addition, this structure may not fit the needs of the business as it grows, especially if additional owners become involved. Talk to a lawyer about whether a sole proprietorship structure makes sense for the business you're planning to start.